The Bank of Nova Scotia

Please stand by. Your conference will begin momentarily. This conference is being recorded.

Good morning, and welcome to Scotiabank's 2023 second quarter results presentation. My name is John McCartney, and I'm head of investor relations here at Scotiabank. Presenting to you this morning are Scott Thompson, Scotiabank's President and Chief Executive Officer, Raj Viswanathan, our Chief Financial Officer, and Phil Thomas, our Chief Risk Officer. Following our comments, we will be glad to take your questions. Also present to take questions are the following Scotiabank executives. Dan Rees from Canadian Banking, Glenn Gowlin from Global Wealth Management, Francisco Arista-Guita from International Banking, and Jake Lawrence from Global Banking and Markets. Before we start, and on behalf of those speaking today, I'll refer you to slide two of our presentation, which contains Scotiabank's caution regarding forward-looking statements. With that, I will now turn the call over to Scott.

Thank you, John, and good morning, everyone. We appreciate you joining us today. Before I begin, I want to take a moment to acknowledge the ongoing impact of the wildfires in Western Canada. The Bank has made a donation to the Canadian Red Cross to support the relief efforts, and we have initiatives and branches across Canada to raise additional funds. I would like to thank our teams for supporting our customers and the communities that have been impacted. As the situation evolves, our top priority is the safety of our employees and ensuring we continue to support customers as they recover from these fires. Despite the challenging market conditions this quarter, the bank delivered resilient operating performance, reflecting the stability of our business model, while absorbing the impact of elevated funding costs and higher operating expenses. Our common equity Tier 1 capital ratio strengthened in the quarter to 12.3%. The capital bill this quarter brings us above our 12% target sooner than expected, and we will aim to remain at 12% or above until we have more conviction on the macroeconomic outlook and regulatory expectations. This morning, we also announced a 3% increase to our quarterly dividend, bringing it to $1.06 per share. The bank also made progress in strengthening its liquidity position with deposits outpacing loan growth quarter over quarter. Our liquidity coverage ratio was a healthy 131% at quarter end, up from 122% in the prior quarter. The events in March in the U.S. regional banking sector and in Europe highlighted the stability and security of the Canadian banking system. Throughout our America's footprint, customer confidence in Scotiabank was reflected through deposit balance stability during this time of dislocation. Our diversified global business model is a competitive advantage for our business. I was particularly pleased to see the improvement in deposit growth across our platform. Year-over-year deposits increased by 11% or approximately $68 billion, and on a sequential basis, deposits increased by 2%. Importantly, our overall loan to deposit ratio improved modestly quarter over quarter, driven by improved results in Canadian and international banking. Deposit growth in Canada accelerated to 11% year over year and 3% quarter over quarter, outpacing loan growth for the second consecutive quarter. Throughout our international banking footprint, we experienced solid deposit growth above our loan growth on both a year over year and quarter over quarter basis. The loan to deposit ratio improved by approximately 250 basis points quarter over quarter. The credit quality of our loan book continues to be high. Our retail loan portfolio is primarily secured and the corporate lending book is mostly investment grade. However, in light of a more uncertain macroeconomic outlook and given the significant growth in our loan book over the last year, we're taking a more conservative view and increasing our performing loan allowances and thereby building our overall ACL coverage. Specific to our commercial real estate exposure, we provided additional disclosures related to the composition of the portfolio. Our exposure and recent growth are heavily weighted to the residential and industrial segments, which together comprise 75% of the portfolio. The office segment represents less than 10% of our overall commercial real estate exposure, with U.S. exposure at only $300 million. Looking ahead, although I continue to remain cautious on the outlook for the remainder of the year, there are some encouraging signs that lead us to believe our revenue and pre-tax, pre-provision profit should improve modestly in the coming quarters. First, the bank's net interest margin modestly improved in Q2, driven by loan repricing in Canada and international banking, which should continue. Net interest margin in Canadian banking was up four basis points, and an international up 12 basis points with a strong Caribbean contribution where we are competitively advantaged from a deposit perspective as the lead relationship bank in many of our markets. Second, with the exception of Canadian mortgages, we expect to see modest quarter-over-quarter loan growth across the bank for the balance of the year. Finally, on the expense line, we expect quarter-over-quarter growth to be modest. We will continue to be vigilant on expense growth for the remainder of the year. Overall, we believe Q2 will be a low point for our profitability in 2023, with modest improvement going forward. Lastly, given the increased probability for rates to remain higher for longer, we have modified our interest rate positioning. Even with this repositioning, we stand to meaningfully benefit from declining rates because of the structure of our balance sheet. Going forward, our three priority areas are focusing on primary customer growth to drive long-term multi-product profitable relationships, purposely allocating capital to improve our business mix and support profitability, and operating in an efficient and agile fashion to drive both revenues and reduce costs. I would like to make a few observations on our business performance in the context of these objectives. First, focusing on customer orientation. This quarter, we completed the national rollout of our ScenePlus program in Empire Stores with the Quebec rollout in March. Later this summer, we will continue to add to this market-leading loyalty program with the addition of home hardware, building off the success of adding Expedia and Rakuten last year. The deposit growth and the rollout of ScenePlus are key components of our strategy to grow primary relationships with our customers in Canada. And so far, the ScenePlus program is exceeding our expectations. ScenePlus has an excess of 13 million members and climbing, with Quebec driving an oversized share of that growth. Since the national launch began, we've added over 600,000 new Scotia debit and credit card accounts into the ScenePlus program. Our data confirms that customers who are ScenePlus members are four times more likely to have three or more products with the bank. Tangerine is now the sixth largest personal deposit bank in Canada, with $47 billion in deposits and assets under management of $6.1 billion. Our success to date can be attributed to a strong brand, a market-leading digital customer experience, and an unrelenting focus on growing deposits. Given Tangerine's limited overlap with Scotiabank's customer base, this franchise presents a great opportunity for us to win market share and grow our presence in the Canadian market with a digital-first approach. In international banking, we continue to focus on priority customer segments, strengthening digital and improving customer experience to drive customer primacy and long-term deposit growth. Digital remains instrumental in driving our customer engagement, with digital sales reaching almost 70% in the quarter. We have seen improvements in customer experience metrics across all of our international markets. GBM continues to build capabilities in order to provide a growing product suite to clients. To further capitalize on the growing private capital space, we recently announced the hiring of a US-based private credit structuring, syndication, and sales team. In addition, our domestic Canadian ECM and DCM businesses have moved to leading market share positions in recent quarters. Our U.S. DCM business continues to gain share, and the Pacific Alliance countries we rank second year to date in the DCM league tables. Our global wealth business continues to execute on the total wealth strategy, bringing fully integrated solutions to our high net worth clients. The business was recognized by Global Finance as the best private bank for net worth between $1 million and $25 million. and buy euro money as the best domestic private bank in Canada. Encouragingly, the international wealth business continues to grow at double-digit rates with 19% growth year over year. In short, Q2 was a period of progress on client franchise initiatives already underway. The second objective, purposely allocating capital to improve our business mix and support profitability. We continue to build more discipline in our approach to capital allocation and we are viewing this through an enterprise-wide lens. We will prioritize relationships where we can provide value beyond just the balance sheet. I was encouraged to see the improvement in multi-product relationships in Canada during the quarter and pleased to see the discipline around client prioritization in our GBM business. And finally, operational excellence. As part of my objective to drive operational excellence throughout the bank, I remain committed to disciplined cost management. Strong expense management has long been an important hallmark of the bank's culture. It is notable this quarter that our expenses grew much faster than our revenues. I was encouraged to see the deceleration of expense growth on a sequential basis in our Canadian and GBM franchises, but as a management team, we recognize the need to deliver positive operating leverage over time. By focusing on these strategic priorities, we'll be a more efficient and more profitable bank. Before concluding, I wanted to make a comment on our recent leadership announcement. I am thrilled to welcome Francisco Aristeguita as our head of international banking. Francisco joins us with a career of experience in highly successful leadership roles in global banks and brings significant operating experience throughout our international footprint. Francisco officially joined the bank earlier this month and is with us here today on the call. Welcome, Francisco. Thank you. I will now turn the call over to Raj for a more detailed presentation on the financial results.